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How offshore fund administrators add value to investment funds

Third party fund administrators have proven to be more than just duplicators of ounting and corporate secretarial activities otherwise performed by fund managers. There are a number of reasons why an investment fund profits from the involvement of a third party administrator. Although the core activity of a fund administrator remains accounting and performing registrar and transfer agency services, the fund administrator is also a consultant with experience in structuring, legal and accounting issues, provides fiduciary and corporate secretarial services and acts as liaison between the investors and the fund and between all parties involved with the fund.

Structuring and establishment
The administrator acts as a project manager during the pre-launch phase of the fund. In this capacity the administrator has many responsibilities such as acting as facilitator of the process, liaising with the investment managers, (prime) broker(s), legal and tax counsel, auditors, supervising authorities and notary or registered agent involved in the establishment of the fund.

The administrator also supervises the process and ascertains timely delivery of the structure. In certain cases it may draft the offering memorandum and agreements, incorporate the fund and register the fund with supervisory authorities, if required.

As a provider of services to many funds, administrators gain extensive experience in assisting in the pre-launch phase and can select and suggest the most appropriate parties to involve in the set-up, from its extensive network of professional service providers.

Accounting and calculating Net Asset Values

Transactions of the Fund are entered into the Administrator's accounting system on a daily basis. Although in certain circumstances the entering of such data is still a manual process, today it is practically fully automated, making use of electronic links to prime brokers, custodians and banks and electronic pricing.

In this way the accounting records are up-to-date throughout a period and the administrators will be able to report the Net Asset Value within hours to 10 days after a valuation date.

By providing valuation of the fund's portfolio from independent sources the administrator serves an important interest of the fund's investors. The involvement of an independent administrator adds significantly to the reliability of the Fund's performance reports, assuring that they are unbiased.

The speed and accuracy with which this process is carried out are critical to maintain investor confidence and satisfaction. Even a well performing fund will not satisfy investors if its N.A.V. reports are frequently overdue or inaccurate. Most administrators have taken various measures to ascertain the quality of the outcome of their core processes. Some of the best administrators have had their internal quality management systems audited and certified under well known international quality standards such as ISO and SAS70, providing additional comfort to investors and other parties involved with a fund served by them. The measures taken to guarantee consistent high quality focus on one hand on systems and technology and on the other hand on staffing.

By capturing trades and prices automatically in its accounting systems, the administrator realises efficient processing with a significantly reduced chance for input errors. Also, the reconciliation of trading positions and cash balances to the Fund's balance sheet is done automatically as much as possible. As a result the type of activities of staff involved with a fund has changed from data entry to high-level controlling and analyzing. This requires staff with a broad understanding of investment funds, analytical skills and critical attitude.

Registrar and Transfer Agent
The administrator in its role of registrar and transfer agent keeps a record of shareholders of a corporation by name, address and number of shares owned. The registrar and transfer agent is responsible for input, processing and control of subscriptions, redemptions, transfer and exchange transactions. It also issues share certificates, if required, in the name of the owner and cancels old certificates. In the process of accepting a subscription, they perform certain agreed upon client identification procedures (Know Your Client (KYC) procedures).

In performing its task as registrar and transfer agent today's administrator makes use of a fully integrated real time share registration system, which also supports incentive fee calculations based on the series or equalization method.

Shareholder services
The shareholder's department is an important link between the fund and (potential) investors, as it acts as the intermediary in the exchange of information.They are often the first contact that the (potential) investors have with the fund. It is important to note that the administrator promotes the interest of the investors first.

As provider of shareholder services, the administrator is engaged in:
n communications of Net Asset Values to shareholders;

n responding to shareholders and potential shareholders inquiries, requests and complaints, if any; and

n distribution of offering memoranda, subscription documents, annual financial statements and other requested documentation.

Corporate Secretarial Services
The administrator may also act as corporate secretary to the Fund. In that capacity it:

n maintains all statutory books and records of the Fund;

n arranges and organizes Managing Board and Shareholder Meetings;

n oversees the compliance with laws and regulations and takes care of filing etc.

 

Other services

Corporate Management

The administrator deals with the day-to-day operations of the Fund. In many cases it provides one or more Directors for the Fund. It also provides a business address, access to telephone and fax lines and everything else that might be required in assuring adequate substance to the Fund.

ConsultingThe administrator has knowledge of developments in legal, tax, accounting and technical matters. It can share this knowledge with its existing and prospective clients.

Offshore versus onshore
An important issue to be taken into consideration in the structuring of a fund is the choice of domicile. A number of offshore jurisdictions have developed into financial centers with high quality service providers including fund administrators, auditors and tax and legal counsels. This makes them an interesting alternative to be considered in structuring a fund.

Some of the advantages of an offshore investment fund include:
n deferring and/or minimizing taxes;

n less or no regulations;

n unrestricted investment strategies; and confidentiality

Deferring or minimizing taxes
Tax issues exist for investors, the investment fund and the investment manager. In most offshore jurisdictions corporate income tax payable by an investment fund is minimal or non-existent. For investors it is essential to consider how income derived out of investment in the fund is characterized (e.g. dividend or capital gain) as well as the timing of such income.

Other aspects that may be of influence in structuring a fund are anti-deferral or anti-tax haven regimes in the country of the projected investors' residence, as well as treaty and tax credit issues and the characterization of the investment fund (corporate vs. pass-through)

For the investment manager an offshore fund may provide opportunities to defer and minimize taxes payable on its investment management and incentive fees. On the other hand, an onshore investment manager serving an offshore fund may run into transfer pricing issues.

Regulatory issues and investment restrictions
Regulations in offshore jurisdictions are mostly less restrictive than those in "onshore" jurisdictions. Although a lack of regulations may simplify the structuring and operations of an investment fund there are reasons to choose for regulated or semi-regulated jurisdictions:

n certain corporate investors, such as insurance companies and banks and pension investors may be sensitive to particular industry regulatory issues;

n investors may require an investment fund to be domiciled in a regulated environment; and

n investors may require an investment fund to be listed for easier exchange of their interests.

Regulations can be applicable to an investment fund, an investment manager and/or the administrator. Also, regulatory authorities may impose investment restrictions. Such investment restrictions may not fit in with a certain investment strategy. Restrictions may be imposed on the ratio listed/unlisted securities, the holding of a certain type of security, the holding in one single issue and the level of borrowing.

The major Caribbean offshore jurisdictions do not impose investment restrictions and are generally low to semi-regulated.

Confidentiality
Although increased transparency is clearly the direction in which offshore jurisdictions are pressed by international organizations to develop, most jurisdictions have confidentiality laws in place. The major jurisdictions also have clear anti-money laundering legislation in place. Investors appear to prefer the anonymity of an offshore fund established in jurisdictions with legal requirements that keep the identities of investors confidential.

The schedule below details some of the described aspects for the major Caribbean jurisdictions.

Conclusion
As liaison between the Fund and the investment manager , the investors, auditors, regulatory bodies, brokers, tax authorities and banks, the administrator wears many hats and serves various interests. It requires involvement of specialists in different areas and close working relationship of all parties involved to ensure the proper operation of a fund. The administrator's most important role is that of safeguarding the investor's interest by its independent verification of the fund's investments and their value.

By performing the administrative day-to-day tasks a fund requires, the administrator allows the investment manager to concentrate on managing the investments.

 

 

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